Digital revolution almost complete

Hoyts Entertainment Group is on the verge of completing a $50 million capital expenditure program to digitise its 50 cinemas, which will usher in a new era for moviegoers.

“There has been an ongoing program of digitising all of the projectors and screens in Australia,” said chairman David Kirk, who celebrates three years in the job this month. “The industry is moving to digital, so increasingly all films will be made digitally and not on film.”

Although some leading directors such as George Lucas began calling for a digital revolution in cinemas many years ago – Lucas was one of the first to exploit the format for his Star Wars series – the transformation took a long time to arrive.

About three years ago exhibitors such as Hoyts, Greater Union and Village Roadshow signed an agreement with the major film distributors under which the distributors agreed to help fund the digitisation program through a virtual print fee, which began flowing about a year ago.

The fee, which lasts for seven years, mostly covered the costs of the digital capex, said Mr Kirk. It is also in recognition of distributors being able to make substantial savings by eliminating the need for multiple, costly film prints for every movie.

Consumers benefit from a clearer, sharper picture and from the ability for directors to integrate digital effects more seamlessly into the film-making process, he said.

Conversely, exhibitors benefit from a superior product for which they can charge higher prices.

“Cinemagoers are happy to pay to see a great movie,” said Mr Kirk.

The digital rollout also enables Hoyts, which has 40 cinemas in Australia and 10 in New Zealand, to offer another layer of product by installing “extreme screens” in some of its larger cinemas.

The largest measures 25 metres in width, with others about 17 to 20 metres wide.

It’s part of a longer-running strategy by all exhibitors to progressively segment their offerings and audiences, allowing them to push through price increases and therefore offset any volatility in cinema attendance numbers over the long term.

“Extreme screens” is the latest idea for premium pricing, complementing higher priced tickets for 3D films and the smaller luxury theatres where patrons can indulge in waitered food and alcohol (Hoyts has La Premiere, Greater Union the Director’s Suite and Village Gold Class).

And, of course, the ubiquitous candy bars that account for about 20 per cent of exhibitors’ revenues, are always suitable for an annual mark-up.

Mr Kirk said total gross box office receipts in Australia were up about 4 per cent so far in 2012 and that he was confident of another record year on the back of forthcoming films such as The Dark Knight Rises and The Hobbit.

“There’s been a pretty consistent performance this year,” he said.

In 2011, however, the domestic box office’s gross of $1.09 billion fell 4 per cent on the previous year’s $1.13 billion, according to Screen Australia. Locally produced films accounted for only 3.9 per cent of the total box office last year.

Mr Kirk said that although cinema attendance figures had been flat recently, people were still inclined to go to the movies because it was a relatively low-cost entertainment option amid the general consumer malaise.

“There’s a lot of competition, not so much for the entertainment dollar, but for the entertainment hour,” he said.

Mr Kirk said there were no plans to float Hoyts, nor to sell it by way of a trade sale.

“The business is very stable and going along well,” he said. “We see a solid trading period ahead of us.”

Private equity firm Pacific Equity Partners, which owns about 90 per cent of Hoyts, with management and mezzanine financier International Capital Group owning the rest, abandoned plans for a listing or sale deciding to focus on lifting the cinema and movie distribution group’s earnings. Besides the core exhibition and distribution business, Hoyts also owns cinema and outdoor advertising company Val Morgan.